Cowen Is ‘Back in the Saddle’ with Altria; Upgrades to Outperform

After buckling under new regulatory hurdles last summer, Altria Group (MO) is looking a lot more attractive lately. Cowen analysts Vivien Azer and team have taken note. They upgraded the shares to Outperform Tuesday, setting a price target of $71.

Azer writes:

The FDA's surprise announcement left us indicating that we would be inclined to get more constructive on MO at $60 (or 16x FY2 PE). With the stock having traded below $61, we are upgrading the shares, as we view the current risk / reward as favorable. As a reminder, we continue to believe that FDA risk is longer-term, and do not expect any near term risk to numbers over the next 2-3 years, but believe that now, the market has digested this risk.

Altria shares were up $1, or 1.5%, to $64.75 by mid-morning Tuesday. They traded as low as $61.22 on September 20. The current dividend yield is 4.1%.

The recent stock gains are pegged to Altria successfully raising prices for the second time this year. Azer notes:

Late last week, MO announced its second price increase of the year, taking up pricing on cigarettes a notable 10 cents across the board, which competitors BATS and IMB followed. For Marlboro, on a percentage basis, this was the biggest increase that we have seen for the market's leading brand since 2011. While this may in part be informed by the deteriorating market share trends that we are seeing for Marlboro (as the brand cedes share to Newport), we had already been looking for market share losses next year, such that this incremental pricing should fuel profit growth in excess of our prior expectations (prompting us to raise our 2018 estimates ahead of consensus).

She has some concerns about the lower-income market, but says Altria's cigarettes are already at premium prices, which makes them less vulnerable than discount brands to customers cutting back to save money.

Shares of Philip Morris International (PM), which operates in overseas markets, were also higher Tuesday. That stock was up 95 cents a share, or 1.1%, to $113.13 at 10:20 a.m. ET.

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